What exactly is going on ? Maybe, we should take a closer look at the Dow Jones Index and try to see where the market may go in the weeks ahead.
Please note that we are not going to predict the market. No one can predict the market. Rather, we are going to position ourself so that we can make profits if the market goes our way.
I have shown a screenshot of Dow Jones Index as charted in TradeStation.
In it, I have drawn three moving averages : 10 day average, 20 day average and 50 day average.
Usually, if a stock is in a strong uptrend, it just kisses the ten day moving average and then flies up.
As it becomes weaker, it goes down to the 20 day moving average, kisses it and then goes up slowly.
As it becomes more weak, it goes to the 50 day moving average, kisses it and then crawls up.
Eventually, the stock becomes too weak to get support at the 50 day moving average.
At that time, one of two things can happen.
1. In first scenario, the stock will just chop around up and down in a drunken stupor, because it does not know what to do or where to go and the market participants are neither supporting the bulls nor the bears.
2. in the second scenario, the stock will cross the 50 day moving average downwards and will turn the trend to bearish in a neat manner. Then, it will rise upwards to kiss the 10, 20 or 50 day moving average before going down again.
In the figure, at points A, B, C, D and E, the price just kissed the 20 day average and rose up again.
Point F was a shocker. no one expected the price to suddenly drop below the 50 day moving average. it dropped suddenly and was in a state of confusion until point G.
After point G, it again resumed its uptrend. Notice at points H, I and J, the price just kissed the 10 day moving average line and then zooms up.
At point K, the price was slowing down. It has started touching the 20 day moving average and going below it.
At point L, the situation has deteriorated. The price has started touching the 50 days moving average for support.
The price is failing to make a new high. it has recently formed two double tops. the second peak did not go higher than the first peak.
So, the best thing you can do now is to get your shorts ready.
If the market drops below the 50 days moving average,we can be ready for shorting the market.
Again remember, RISK CONTROL is the best policy. Do not risk more than two percent of your capital in any trade.
